'I own 75 buy-to-let properties but I haven't deprived other buyers'
09-07-2015
As investors digest George Osborne’s surprise new tax on buy-to-let, questions emerge about the wider impact on housing and rents
Graham Chilvers outside his Torquay block which was formerly a hotel. Photo: Jay Williams
By Richard Dyson
The Government is coming under increasing pressure to reverse draconian new taxes applying to buy-to-let investors, announced in the July 8 Summer Budget.
Landlords argue that not only will the change force them to evict tenants and sell properties en masse, but that it will also prevent the building and development of new homes - hindering the Government’s objective to increase housing supply.
The proposed tax change, applying in full from 2020, will only hit those landlords with mortgages. Many landlords have calculated that they will have to pay more than 100pc of their profits in tax when the change is fully implemented.
Scroll down for a worked example of the new tax.
Torquay landlord Graham Chilvers owns 75 properties. None of them, he says, could have been bought by first-time buyers - because in every case he either built or restored them himself.
Under the Government’s proposed tax changes, the financing of such projects would no longer stack up, he said.
Potential properties would remain derelict or would have to be developed by large commercial companies who are not impacted by the proposed new tax, which only targets private individuals.
“The Government justifies its attack on buy-to-let by saying landlords have an unfair advantage over people wanting to buy their own homes,” Mr Chilvers said. “But no homebuyer was competing with me on any of these properties.”
Mr Chilvers is pictured in front of a former Victorian hotel which in 2004, when he bought it, was in disrepair and occupied by squatters.
He converted the main building into nine two-bedroom apartments, and built two three-bed homes in the space formerly occupied by a swimming pool.
Many of his other properties were also once hotels or care homes, while some he built from scratch.
He reckons his portfolio is worth £6.4m, against which there is a modest £2.4m borrowing.
Rental income totals £330,000 per year. The cost of mortgage interest is £80,000 with maintenance, insurance and other expenses coming in at £100,000 to £120,000.
That gives a taxable annual profit of between £130,000 and £150,000.
His tax bill today is around £50,000. When the new taxes are fully applied he will pay an extra 32pc in tax, with his bill rising to almost £70,000.
He would then be paying a tax rate of 44pc.
That calculation is based on all other factors - rent, expenses, interest rates, and so on - remaining the same.
‘As my gross income goes down, my tax bill goes up’
One of Mr Chilvers’ biggest anxieties is the way the proposed tax will bite when interest rates rise. Because of the perverse way in which the tax operates, landlords will actually pay more tax when their mortgage costs go up - even though this will result in their having less gross profit.
This Alice in Wonderland tax: how Osborne has killed buy-to-let for all but the very rich
“Not only will this tax prevent me from undertaking further development, but it poses real risks to my business just at a time that interest rates could rise,” said Mr Chilvers.
Buy-to-let tax campaign logo
His mortgages currently charge an average rate of 3.3pc. He calculates that if this figure lifts by two percentage points to 5.3pc, his mortgage interest bill will be £128,000. At that point the total tax payable will rise to £75,000.
His effective tax rate, expressed as a percentage of his gross profits, will then be 53pc. Mr Chilvers has a created an online calculator which other landlords can use to see how the tax change would affect their own circumstances.
Other full-time landlords share Mr Chilvers’ view that mainstream homeowners are not competing for the same properties as landlords.
Thousands are voicing their dismay on popular landlord websites, such as the buy-to-let portal Property118.com. Many have written to their MPs and over 25,000 have signed a position for the tax to be amended or reversed.
Cathy Colston, a retired Boots executive who became a full-time landlord in 2010, owns around 20 properties in the western centres of Bath, Cardiff and Bristol.
“There are problems in the housing market and yes it is difficult for homeowners to buy,” she said. “But landlords are not the problem. Almost all the properties I want to buy are not the same as those wanted by owner-occupiers. People buying their own home are largely guided by their hearts – it’s about where they want to live.
“I am buying very much with my business head, and looking at potential returns.
“The real problem preventing people from buying their own homes is the lack of mortgag finance. The Government’s argument that this tax change will make a level playing field between investors and ordinary homebuyers is flawed.”
Cathy Colston owns around 20 properties in Bath, Cardiff and Bristol. Photo: Christopher Jones
Like many professional landlords she is not altering her strategy until more detail about the new tax regime emerges. This is expected within weeks as part of the Finance Act.
She said future options included selling some of the properties in order to pay down the mortgages on others.
She owns most of her existing properties in her name. Future properties are likely to be bought through a company structure, where the impact of the tax change can be mitigated. “I do want to keep growing my business,” she said. “The whole point of this was to provide an income to live off.”
One of the problems of buying properties through a company is that mortgages are far more difficult to arrange. “I think that will become an area to watch,” she said. “It has been relatively easy for individuals to arrange buy-to-let mortgages in their own names. Raising finance through a limited company will be harder.”
How the tax change works: a summary
Every mortgaged landlord who pays 40pc or 45pc tax will pay much more tax under the proposals.
Some basic-rate taxpayers will also pay more tax – because the change will push them into the higher-rate bracket.
The only buy-to-let investors who will not be hit are the very wealthy who buy property in cash and who don’t need a mortgage.
At the heart of the change is landlords’ future inability to deduct the cost of their mortgage interest from their rental income.
In other words, tax will be applied to the rent received – rather than what is left of the rent after the mortgage interest has been paid.
Here is a worked example reflecting the changes and assuming you, the landlord, pay 40pc tax.
TODAY:
Your buy-to-let property earns £20,000 a year in rent and the interest-only mortgage costs £13,000 a year. Tax is due on the difference or profit.
So you pay tax on £7,000, meaning £2,800 for HMRC and £4,200 for you.
2020:
Tax is now due on your full rental income of £20,000, less a tax credit equivalent to basic-rate tax on the interest. So you pay 40pc tax on £20,000 (ie £8,000), less the 20pc credit (20pc of £13,000 = £2,600), meaning £5,400 for HMRC and £1,600 for you. Your tax bill has therefore gone up by 93pc.
Now, say Bank Rate – and in turn your mortgage rate – rises by a small fraction, lifting your mortgage cost to £15,000, while your rent remains at £20,000.
You will have to pay £5,000 tax in this scenario, so you make no profit at all.